Understanding Put Spreads

Hyper Momentum Trader - February 16, 2023 [Image](   [ARCHIVES]( LIVE]( [Twitter]( [Youtube]( [Instagram]( [Tiktok]( [Discord]( [LinkedIn]( Tech expert Nick Black is helping his followers capitalize on the biggest gainers in the AI market right now. While the mainstream media obsesses over OpenAI and ChatGPT, Nick and his followers have captured triple-digit gainers like 874%... 550%... 347%... and 570%... all since December 2022! But don’t worry if you missed those – because Today, [Nick will reveal his biggest play yet.](   February 16, 2023 Dear Reader Today during our [Hyper Momentum session]( there was a question in the chat about using spreads, or more precisely, put spreads, as a possible trading strategy. So, let me take a moment to explain how we like to use spreads. Suppose you believe that a stock like Ark Innovation ETF (ARKK) will decrease due to market conditions or earnings reports. In that case, the option's strike price you select will influence your risk, probability of success, and payout potential. For instance, if you purchased the in-the-money (ITM) $44 put for $160 with a strike date of February 24th, 2023, your probability of profit would be 37.8% based on historical implied volatility, and you would need the stock to fall below $40 to make money. However, you could do a put spread by buying a put and selling a put, which would give you the right, but not the obligation, to buy ARKK stock at $44 and then sell the right to sell it at $42, limiting your potential upside, combining the two results in a put spread, increasing your probability of profit and lowering your cost. Your max return is 116%, assuming the stock remains under $42. The further out of the money you go, the lower your probability of profit. When using this approach, I prefer to stay in the money with the first put while trading two or three ticks out of the money with the one I buy. This allows me to define my risk up front and set a stop if the stock turns around. I'm willing to risk 33% to make an upside of 100% to 138% potentially. Now, let's consider the other side of put spreads. If I want to own a stock, a popular strategy is selling puts to enter a position. If I sell a straight put, that gives someone else the right but not the obligation to sell their stock to me if it hits a certain price on or before a specific date. Let's use a stock we'd be comfortable owning, for this example, Occidental Petroleum (OXY). If I sold the 57.50 put on Occidental for March 17th, I would have to put margin up to sell the put. However, I would only generate a 2% return, or 23% annually, with an 82% probability of profit. If momentum goes negative, this stock could plummet fast, and I could be on the hook for every dollar if it falls below $56.42. But if I do a put spread, it changes the situation dramatically. For example, I could sell the March 17th $57 put and buy the $55 put, creating a bull put spread. In this case, I'm putting up only $206 in margin to make a max return of $44 on risk, with a 21% probability of profit and an 80% annualized return to $60. This is a higher probability of success and profit and a more conservative way of approaching the market. This is the basis of our long-term ownership strategy at Flashpoint Trader. If you're new to trading options, I hope this helps you understand spreads better. If you want to continue sharpening your trading tools, we discuss strategies like this daily during our Flashpoint Trader session. ([click here to join risk-free]( Cheers! Garrett {NAME}   IMPROVING SECTORS: Communication, Cyclicals   WEAKENING SECTORS: Utilities, Tech   WATCHLIST: IWM, NVDA, DDOG, AMAT   [YouTube]( Did you miss the show? 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